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Fed’s bond-buying timeline: roaring entry, boring exit?

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November 2, 2021

By Ann Saphir

(Reuters) – It is hardly a secret by now that the Federal Reserve is going to reduce its support for the U.S. economy soon: starting this month it will likely begin to pare its monthly asset purchases by $15 billion each month until ending them by mid-2022.

That, at least, is the roadmap suggested by the Fed’s post-meeting statements, minutes of its meetings, and remarks from Fed Chair Jerome Powell. It is expected to be spelled out when this week’s policy meeting wraps up Wednesday, although officials may keep options open for speeding or slowing the taper to suit economic needs.

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But overall, the Fed has telegraphed what Philadelphia Fed President Patrick Harker says will be a “boring” exit from what is now $120 billion in monthly bond buys.

That is despite the fact that the reductions this time will proceed at about twice the pace as the last time the Fed ended a bond-buying program, in 2014.

It is also a stark contrast to March of 2020, when U.S. authorities were first shutting down parts of the economy to prevent the spread of COVID-19. In response the Fed abruptly cut interest rates to zero, rolled out a raft of emergency lending programs, and began hoovering up trillions in Treasuries and mortgage-backed bonds.

The bond-buying is credited with helping stabilize the financial system and, later, to bolster demand and foster a faster recovery from the sharpest downturn in decades.

More recently some Fed policymakers have questioned its effectiveness and even raised the alarm over its potential harms amid an economy marked by rising inflation and too much demand relative to pandemic-constrained supply. They all agree it should be pared back soon, minutes from the Fed’s last meeting show.

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Here is a look back at the arc of the Fed’s pandemic bond-buying program – what policymakers said, what the central bank did, and what’s likely to lie ahead.

(GRAPHIC: In with a boom, out with a … – https://graphics.reuters.com/USA-FED/byvrjrggbve/chart.png)

A CRACK, AND THEN THE FLOODGATES

Fed Chair Powell issued a terse and unusual statement Feb. 28, 2020, as stock markets plunged amid reports of the rapid spread of the novel coronavirus. The Fed, he said, is “closely monitoring developments and their implications for the economic outlook” and “will use our tools and act as appropriate to support the economy.”

Three days later policymakers cut interest rates by half a percentage point. On March 15, they slashed the rate to near-zero, where it has stayed since, and promised to buy “at least” $500 billion of Treasuries and $200 billion of mortgage-backed securities in coming months. Eight days later they shifted to an open-ended pledge to continue buying “in the amounts needed” to smooth markets and aid in monetary policy transmission.

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By the end of April and the two-month recession, the Fed’s weekly accountings show they had added $1.4 trillion of Treasuries, and $234 billion of mortgage-backed securities. The central bank’s balance sheet stood at $6.7 trillion, up from $4.4 trillion before the pandemic.

THE STEADY STREAM

By June 2020, the Fed’s bond-buying had settled into a slower rhythm: $80 billion in Treasuries and $40 billion in housing-backed bonds each month, Powell noted at his regular news conference. In its statement the Fed promised “over coming months” to continue to buy bonds “at least at the current pace” to sustain smooth markets and help transmit monetary policy. In September it kept that language and added that the purchases would “help foster accommodative financial conditions” and keep credit flowing to households and businesses.

SETTING THE TEST FOR TAPER

In December 2020, with its balance sheet at $7.4 trillion, the Fed started the clock on the end to its bond buying, promising to keep up the $120 billion a month pace “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.”

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This language remained unchanged for the statements issued in January, March, April and June of this year.

NEARING THE BAR FOR TAPER

July’s statement acknowledged that “the economy has made progress toward these goals,” and in August Powell said the bar had been met for inflation, and “clear progress” had been made toward maximum employment; it could, he said, be appropriate to start reducing bond buying this year. In its September post-meeting statement the Fed went further: “if progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted.” Powell went still further in the news conference that followed, saying the employment test is “all but met” and “we could easily move ahead at the next meeting,” with policymakers supporting a pace of reduction that “will put us having completed our taper around the middle of next year.”

TAPER TIME

“I do think it’s time to taper.” That’s how Powell put it on Oct. 22, leaving little doubt for the outcome of this week’s meeting. Minutes from the September meeting showed policymakers thought reducing Treasury securities purchases by $10 billion each month and mortgage-backed securities by $5 billion each month would be “straightforward and appropriate.” At that pace, if the taper begins in November, purchases would be phased out completely by June. On Oct. 27 the Fed’s balance sheet stood at $8.6 trillion; at the expected tapering pace, it will be just over $9 trillion when the program ends, twice its pre-pandemic size.

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(GRAPHIC: Fed balance sheet by era – https://graphics.reuters.com/USA-FED/TAPER/xmpjolmanvr/chart.png)

WHAT’S NEXT?

At some point the Fed is expected to take the next step back to monetary policy normalcy by raising rates, although policymakers are currently divided on whether that will happen in 2022 or 2023.

As for the fate of the balance sheet, even less is known. Fed Governor Christopher Waller says the Fed should let its balance sheet shrink over the next few years by letting maturing securities roll off, rather than use the proceeds to buy replacements as it did for years after it ended its post-financial crisis bond-buying program. It’s unclear how widely his view is shared at the Fed.

(Reporting by Ann Saphir; Editing by Dan Burns and Andrea Ricci)

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Yen shines, Aussie sags as Powell turns hawk despite Omicron uncertainty

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December 1, 2021

By Kevin Buckland

(Reuters) – The safe-haven yen held steady on Wednesday, while the risk-sensitive Australian dollar languished near a one-year low after Federal Reserve Chair Jerome Powell signalled a faster taper of stimulus despite the risks around the Omicron COVID-19 variant.

Investors fear that hasty monetary tightening could choke off the nascent economic recovery, with little still known about Omicron’s potential to evade current vaccine protection or how deadly it might be.

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“Investors are staying cautious,” said Shusuke Yamada, chief Japan FX strategist at Bank of America-Merrill Lynch.

“It’s very difficult to make a judgement about the impact of Omicron when we don’t have a lot of information.”

Global markets fell sharply on Tuesday after the head of drugmaker Moderna said existing COVID-19 vaccines would be less effective against the new variant, although BioNTech’s chief executive struck a cautiously positive note, saying the vaccine it makes with Pfizer would likely offer strong protection against severe disease from Omicron.

The Aussie weakened 0.12% to $0.71245 after dipping as low as $0.7063 of Tuesday for the first time since Nov. 3, 2020. The New Zealand dollar was largely flat at $0.68195 after also touching the lowest since early November of last year at $0.6773 in the previous session.

The greenback ticked 0.09% higher to 113.26 yen, but still within sight of an overnight low of 112.535, a level not seen since Oct. 11.

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Powell said in testimony to Congress on Tuesday that Fed officials will discuss at their Dec. 14-15 policy meeting whether to end bond purchases a few months earlier than had been anticipated. The Fed chief finally did an about face on a long-held contention that inflation would be “transitory.”

Powell expressed confidence that the impact from Omicron will be far less than in the spring of 2020, when the pandemic erupted.

In response, traders wound up interest rate hike expectations, with money markets now almost fully priced for tightening at the June meeting.

Powell’s testimony continues later Wednesday.

“Powell’s unexpectedly hawkish tone overnight, essentially asserting that inflation risk has primacy over growth/Omicron risks, should leave the (dollar index) forging ahead,” Westpac strategists wrote in a client note.

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The index, which measures the dollar against six major peers, traded at 95.921 after sliding to 95.544 on Tuesday for the first time since Nov. 18, weighed down largely by an unwinding of bearish bets on the euro, the most heavily weighted component in the basket.

Westpac recommends buying dips in the index down to the mid-95 level.

The single currency slipped 0.04% to $1.1331, down from a two-week high of $1.1387 overnight.

Sterling traded not far from an 11-month low of $1.31945 reached overnight, last changing hands at $1.32955.

(Reporting by Kevin Buckland; Editing by Shri Navaratnam)

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OPEC+ begins two days of talks amid oil rout

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December 1, 2021

LONDON (Reuters) – OPEC and its allies begin two days of meetings on Wednesday to decide whether to release more oil into the market or restrain supply amid an oil price rout and fears the Omicron coronavirus variant could weaken global energy demand.

Oil prices fell to near $70 a barrel on Tuesday from as high as $86 in October, posting their biggest monthly decline since the outset of the pandemic, as the new variant raised fears of a supply glut.

For November, Brent fell by 16.4%, while WTI fell 20.8%, the biggest monthly fall since March 2020.

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“The threat to oil demand is genuine,” said Louise Dickson, senior oil markets analyst at Rystad Energy. “Another wave of lockdowns could result in up to 3 million bpd (barrels per day) of oil demand lost in the first quarter of 2022.”

Also pressuring prices, Federal Reserve Chair Jerome Powell said the U.S. central bank likely will discuss speeding its reduction of bond purchases amid a strong economy and expectations that a surge in inflation will persist.

The Organization of the Petroleum Exporting Countries (OPEC) will meet on Wednesday after 1300 GMT, followed by a meeting on Thursday of OPEC+, which groups OPEC with allies including Russia.

Several OPEC+ ministers, including from Russia and Saudi Arabia, have said there was no need for a knee-jerk reaction from the group.

But some analysts have suggested OPEC+ might put plans to add 400,000 barrels per day (bpd) to supply in January on hold.

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The group was already weighing the effects of last week’s announcement by the United States and other countries to release emergency crude reserves to temper energy prices.

OPEC+ has been gradually winding down record supply cuts of 10 million bpd implemented last year and currently has some 3.8 million bpd of reductions still in place.

The increase in OPEC’s oil output in November has again undershot the rise planned under a deal with allies, a Reuters survey found.

(Reporting by OPEC team, writing by Dmitry Zhdannikov, editing by Richard Pullin)

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New York accuses Amazon of backsliding over worker safety, seeks monitor

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December 1, 2021

By Jonathan Stempel

NEW YORK (Reuters) -New York state’s attorney general on Tuesday asked a state judge to appoint a monitor to oversee worker safety at an Amazon.com Inc fulfillment center in New York City, citing the retailer’s alleged rollbacks of COVID-19 safety measures that were “already inadequate.”

Letitia James, the attorney general, also wants a court order requiring the rehiring of Christian Smalls, who Amazon fired for allegedly violating a paid quarantine by leading a March 2020 protest over conditions at the Staten Island facility.

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James, a Democrat running to become New York governor, sued https://www.reuters.com/article/us-amazon-com-complaint/new-york-attorney-general-sues-amazon-over-covid-19-shortfalls-idUSKBN2AH0C2 Amazon in February in a New York state court in Manhattan over its safety protocols for thousands of workers at the Staten Island facility and a distribution center in the New York City borough of Queens.

She said Amazon is valuing profit over safety and “acting as if the pandemic is over” by rolling back safety protocols even as the Omicron variant https://www.reuters.com/business/healthcare-pharmaceuticals/omicron-variant-could-outcompete-delta-south-african-disease-expert-says-2021-11-30 of the COVID-19 virus threatens to increase transmission rates.

The alleged rollbacks include making the Staten Island facility “mask-optional” for vaccinated workers while not requiring masks for unvaccinated workers, and failing to enforce social distancing.

In her motion for a preliminary injunction, James said the proposed monitor would oversee upgraded cleaning, hygiene and social distancing procedures.

“While case rates, hospitalizations, and deaths rise, Amazon rescinds protections and packs in more workers for its holiday rush,” James said in her motion. “Amazon’s ongoing – and worsening – failure to protect workers must be halted.”

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Amazon said in a statement it has taken a “comprehensive approach” to COVID-19 safety.

“It’s disappointing that the Attorney General is seeking to politicize the pandemic by asking for ’emergency’ relief now despite having filed this lawsuit nine months ago,” Amazon said.

The Seattle-based company is appealing a judge’s refusal in October to dismiss James’ lawsuit.

Amazon on Nov. 15 reached a separate settlement with California https://www.reuters.com/legal/government/amazon-settles-california-claims-it-concealed-covid-19-cases-workers-2021-11-15 over claims it violated a state “right-to-know” law by concealing from warehouse workers and local health agencies the numbers of workers being infected with COVID-19.

(Reporting by Jonathan Stempel in New York; Editing by Matthew Lewis and Stephen Coates)

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